This is a guest post by The Professor Corey Rosenbloom.
For those of you who missed it, AIG had a large breakout from a short-term symmetrical triangle which led to a sudden achieving of the ‘measuring objective’ or price projection target. Let’s take a look at this triangle, as it serves as a great example of the “price consolidation and expansion” principle, as well as a near perfect ascending triangle trade set-up.
This chart shows the internal (30-min chart) for all of September so far. If we looked further to the past, we would have seen a huge surge to the upside, and this is the consolidation period/phase after the upward impulse.
Keep in mind that AIG has risen from $12.50 in early August to $54 presently in September – that’s astonishing. However, this post is focused mainly on recognizing and trading the triangle as seen above.
The ideal symmetrical triangle will form an obvious contraction in price range – which often is signaled by drawing two converging trendlines off price swing highs. During this time, volume contracts as the triangle forms and price compresses further – reaching a “Value Area” (to use a Market Profile term).
This means that buyers and sellers are in ‘balance’ and are ‘comfortable’ with the established price (around $40 per share). However, as we know, balance and perfection cannot hold in the stock market, so the smallest thrust (or impulse) out of the ‘value area’ can cause shorts to cover quickly, and simultaneously draw in new buyers, excited about higher prices… which causes more shorts to cover quickly.
As such, you get a one-sided (”positive feedback”) market as a virtuous circle (or vicious circle… depending on which side of the market you are on!) develops.
Without getting too deep into market pricing theory, let’s just say you want to be a buyer as the upper trendline is breached to play for the expected (though never guaranteed) price breakout move. The move could have just as easily came to the downside, so it’s often best to wait until the market tips its hand before putting a position on. A stop would go on the opposing side of the trendline.
The target is just a classical “triangle” target, which is to take the ‘height’ (or distance between the two highest points of the triangle) and add that to the breakout price (at $42).
The height in this case was about $10, so that gives us a target of $42 + $10 = $52… which price hit and exceeded today on the morning gap. This would be your exit on the trade. Markets have a tendency to find resistance (or support) at price pattern projections, as seen here so far.
Continue studying this pattern for additional insights that will help you the next time a similar triangle forms in your favorite stock or market.
Corey Rosenbloom, CMT Afraid to Trade.com
Follow Corey on Twitter: http://twitter.com/afraidtotrade
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